Capital Gains Tax for Real Estate Sales

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What Is Capital Gains Tax for Real Estate Sales?

Capital gain tax is the tax that the government charges when you make a profit from selling your real estate.

Capital gain is essentially profit you made on the sale of your property. It is the difference between the price you initially bought the property and its sale price minus some expenses. And the federal government, and most state government, will tax you. The tax rate will be less if you have owned your property for more than 12 months.

How to Reduce Capital Gains?

You can reduce your capital gains by factoring in your expenses. There are three types of expenses.

  1. Capital Improvements: You may subtract the cost of any capital improvements you have made to your property. Capital improvements are improvements that add value to the property or prolong its useful; they are not repairs from normal wear and tear. For example, replacing broken carpet with new carpet is not a capital improvement, but replacing it with hardwood floors is a capital improvement.
  2. Sale Cost: You may subtract any associated expenses incurred when you were selling your property, such as real estate agent’s commission, advertising, and legal expenses.
  3. Other Exemptions: Lastly, you should apply every exemption possible to reduce your capital gains. Exemptions include owning your property for over a year, and selling your house after living in it for two of the past five years that you have owned it.

Can I Do a 1031 Exchange Instead?

A 1031 Exchange is essentially you swapping a property for another property within a 6-months period. You do not need to pay capital gains tax if the equity in your new property is at least as much as in the property you just sold.

To take advantage of the 1031 Exchange, you must contact a real estate law firm. And within 45 days of the sale, you will need to file with the law firm a list of properties you want to swap with. And at the 6months mark, you must buy a new property; otherwise, you will owe capital gains tax.

Consulting an Attorney

For certain activities such as doing a 1031 Exchange, the law requires you to use a real estate lawyer. Even so, a real estate lawyer can determine what proper exemptions to apply to reduce your capital gains tax.

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Last Modified: 02-12-2014 12:29 PM PST

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